G-to-G privatisation: no cakewalk

One key sales pitch that the powers that be are making on taking the Pakistan’s economy from the perpetual balance of payment crisis is seeking Government to Government (G-to-G) investment including the sell-off of State-Owned Entities to the Middle Eastern state-owned companies. A word of caution is required before deploying this approach.

For example, in 2023, a 25-year concession of container terminal at KPT (Karachi Port Trust) was extended to Abu Dhabi Ports Group without any tendering, and lately, another deal has been inked where outsourcing of bulk and general cargo terminal (non-containerized) at seven births are also being handed over to the Abu Dhabi Port, as well.

The container terminal concession was earlier with Pakistan International Container Terminal (PICT) and had there been open bidding for the recent concession, PICT would have had the first right of refusal. However, since it was G-to-G transaction (with no public bidding), PICT was not asked which is a global port management company with headquarters in the Philippines. The signaling was not right for global private players in shipping and other businesses.

Now another issue surfaced on the general cargo terminal. Here the new concessioners have almost doubled the stevedoring and cargo handling charges without any investment in the existing infrastructure. The objective of giving the concession is that the newly formed company (KGTL) to invest in the infrastructure to reduce the vessel handling time. And once it’s done, traders would not mind charging higher handling rates. How can any investor increase the charges without making investment?

The business community is writing letters to the Ministry of Maritime Affairs against this move, and the issue to be discussed with the new investors. Here the position of the government of Pakistan would be weak as the investor is a UAE-based government entity because of geopolitical positioning of two countries. There are a number of other examples, where position of Pakistan becomes weak due to G-to-G (direct and indirect) transactions.

The case of PTCL (so-called) privatisation is another example. PTCL was bought by Etisalat (a state-owned UAE company) in 2006 and about one-third of proceeds (around $800 mn) are still pending. The Pakistan government could not do much to recover the amount due to G-to-G sensitivities.

Then it was not strictly privatisation as the management was handed over from one state-owned company to another. And the proof is in the pudding – before the privatisation, in FY06, PTCL made profits of Rs20.1 billion ($335 million) and its profits were mere Rs9.4 billion ($38 million) in FY23. This implies that PTCL management change did not yield results, and one reason was that it was not strictly privatisation, as there was no involvement of the private sector in the deal.

The issue is that state-owned (or state-pushed) investment always has strings attached to it. Another example is of plethora of investment in power sector (mainly in IPPs mode) by Chinese companies under the umbrella of CPEC in Pakistan. It’s a well-established fact that the rate of return on power projects envisaged during 2015-18 was higher than what was required, as too many projects are added in too little time.

The outcome is that the cost of power production has become too high due to ballooning capacity payments, as the power demand doesn’t grow in tandem with the power supply while all the projects have sovereign guarantees. The power sector experts try to shift the blame on to economic downturn, as they say the demand projections were based on continuous 6 percent GDP growth to absorb the additional supply. How naïve are they? Didn’t they know the country’s macroeconomic realities at that time?

Well, had these decisions were in private hands, not as many projects would have been envisaged. There was a push from Chinese government to Chinese businesses for making investment, and they locked in, by charging a premium. Now the Chinese government pushed Pakistan government to settle payments and usually link it with other Chinese loans rollover. And because of G-to-G sensitivities, the government cannot negotiate the lopsided debt contracts in these IPPs.

Had the investment been made by the private sector, it would have been easier to negotiate. For example, in late 1990s, when IPPs contracts were negotiated (or attempted to), slowly the American private players exited, and it was relatively easier to deal with the private sector.

The point to note is that G-to-G transactions (and those which are backed by governments) have political dimensions, which are bigger than economic considerations. And with Pakistan’s weak positioning, the other party invariably has the upper hand.

This element should be kept in consideration in case of PIA privatisation. First, it is not best to hand over to any Middle Eastern airline, and it’s better to have a deal with private players. There are local players who are geared to deal with the challenge, and the government should make sure to let the PIA brand name remain intact.

Copyright Business Recorder, 2024